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Are 100-Year Mortgages Next?

Discussion in 'Real Estate & Other Investments' started by Scorpio, Mar 7, 2017.



  1. Scorpio

    Scorpio Скорпион Founding Member Board Elder Site Mgr Site Supporter ++

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    Are 100-Year Mortgages Next? Effects of Negative Real Interest Rates on Nordic Housing Bubble

    by Nick Kamran • Mar 4, 2017 • 37 Comments

    Wage Growth vs. Housing Price Growth

    By Nick Kamran, an American living in Oslo, Letters from Norway:

    Historically, central banks throughout Europe had one mandate: price stability. They did not worry about employment or economic growth, only currency integrity. Setting interest rates to contain inflation ensured that a Krone or a Euro would purchase tomorrow what it could today. Nevertheless, since the ebbing of the 2008 financial crisis, The ECB, of which Finland is a member, officially added full employment and economic growth to their mandate. The Norwegian, Swedish, and Danish Central Bank’s followed suit, stating that they would consider “other factors” than inflation when basing an interest rate decision.

    Hence, instead of remaining impartial — leaving it to lawmakers, markets, and the public to deal with the prevailing interest rate — the central banks became involved in policy making. Adding employment and economic growth to their mandate equates to the National Institute of Standards changing the definition of the meter to help an engineering firm, working on a major bridge project, meet budgetary and timeline constraints. In addition to creating a dilemma, the additional mandates made central banks appear politically biased.

    The Conundrum
    In an attempt to balance, what central bankers perceive as two opposing forces, inflation and unemployment, they chose economic stability over maintaining price stability. The other option, raising rates would have led to greater short-term unemployment. The central banks pushed benchmark rates all the way down, nearing zero in Norway (.5% – Key Policy Rate ) and Denmark (.05% – Discount Rate), hitting it in Finland (ECB at 0% – Refi Rate) and going negative in Sweden (-.5% – Repo Rate).

    Note that central-bank deposit rates are even lower, and negative, to force money out of the banks and into the economy, stoking inflation. Currently, the real interest rates – key interest rates minus inflation — are deeply negative for all the Nordic countries.

    [​IMG]

    Although the policy mostly kept unemployment at bay, relative to historical levels in the respective countries: currently at 4.4% in Norway, 7.3% in Sweden, 4.2% in Denmark, and 9.2% in Finland, it inflated a housing bubble. In Norway and Sweden, where real interest rates are especially negative (-2.3% and -1.9% respectively), housing prices inflated the most. In Oslo and Stockholm, the trend continues.

    Wage vs. Housing Price Growth
    From 2007-2016, professional wages grew, in local currency, 40% in Norway, 32% in Finland, 25% in Sweden and 24% in Denmark. During roughly the same period, apartment prices, in local currency and on a per square-meter basis, surged 107% in Stockholm, 93% in Oslo, and 38% in Helsinki. Copenhagen area, overall, only went up 8% during the same period. However, in recent years, they experienced a surge as well.

    Taking the difference, housing price rise minus wage increases, discounting salary hikes, we can see that housing rose 82% in Stockholm, 53% in Norway and 6% in Finland. In Denmark, wage growth outpaced housing by 16% in the same period. The chart below, taken directly from the Norwegian State Budget, further illustrates the Nordic housing markets compared to other major western markets. Using indexes and accounting for the whole country, we clearly see that Norway is lifting-off and Sweden is going parabolic.

    [​IMG]

    Are 100-year mortgages next?
    Finland and Denmark, the Nordic countries with the least negative rates, experienced the least housing price growth. Wage growth did not keep up with housing prices, (except in Denmark), further illustrating that negative interest rate policy, in general, which intends to go all out for growth, does not properly stimulate the economy and does not promote sustainable growth across all sectors.

    The Nordic case clearly illustrates that central banks should only maintain price stability which upholds currency integrity. The rates, when correctly managed, act as a regulator, ensuring the economy remains diversified. No one sector can take all the growth. The “negative (real and deposit) interest rate” experiments are failing. They’re distorting the economies which undertook them. Surging housing costs are aggravating inequality and depriving other sectors in the economy. For example, retail sales since 2007 in Norway grew only 8% despite a brisk population increase (up 11% over the same period) and expanding consumer credit (up 13%).

    Sweden and Norway are already deep into the bubble; housing continues to outrun inflation and wages at an alarming rate. Helsinki outpaces the rest of Finland but remains in check due to unprecedented construction of new housing. Although Denmark appears to have escaped, recent developments suggest a bubble is on the way.

    Despite the figures and bubble narrative, the Nordic central banks appear to have little appetite, to raise rates, favoring growth and full employment. Nevertheless, they will have to rein inflation in at some point, raising rates. To mitigate a potential crash, we can expect to see the introduction and more widespread availability of longer-term mortgages: 40, 50 and even 100 years. Sweden and Japan already have 100-year intergenerational mortgages. By Nick Kamran, Letters from Norway.

    And America has become “Landlord Land.” Read… So Who’s Pumping Up this “New Normal” Housing Market?

    http://wolfstreet.com/2017/03/04/ne...nordic-house-price-bubble-100-year-mortgages/
     
  2. Usury

    Usury Gold Chaser Platinum Bling

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    But what are the mortgage rates there? I presume the "negative rates" are central banker to bank rates, not banker to consumer rates. Unless they are close to zero or lower, I can't see how a 100 yr loan would make sense. Running an amortization on a 40 yr vs 30 yr loan, there's almost no payment difference because most of it is interest already. I can't imagine a 100 yr note would be that much lower, so why bother?
     
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  3. Hystckndle

    Hystckndle Daguerreotype Fanatic Site Mgr Site Supporter ++

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    Japan was a user of this length note.
    Many families signed up.
     
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  4. Scorpio

    Scorpio Скорпион Founding Member Board Elder Site Mgr Site Supporter ++

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    To me, one must understand what they are up to:

    First, they know the mort will never go to term,
    Secondly, they charge higher rates for longer terms,
    Meaning they extract more interest until you move on,

    the rest is just a game,

    regardless, you can see the diff here on a 30 vs a 50 yr note amort

    30 yr.jpg

    50 yr.jpg
     
  5. Merlin

    Merlin Gold Member Gold Chaser Site Supporter ++

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    All of that, to knock $60 off the monthly payment? Desperate measures.
     
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  6. 3glocks1stack

    3glocks1stack Seeker

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    Anything to keep you in debt.... aka enslaved. Some people will fall for it.
     
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  7. Scorpio

    Scorpio Скорпион Founding Member Board Elder Site Mgr Site Supporter ++

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    Merlin, note also that I had 4.5% for a 30 and 5.5% for a 50.

    The online calc'er did not have the capacity to go to 100

    Here is another calc'er

    http://www.calculator.net/amortizat...term=30&cinterestrate=4.5&printit=0&x=67&y=11

    30 yr 300K at 4.5% = $1520

    50 yr 300K at 5.5% = $1469

    100 yr 300K at 6.5% = $1627

    So the 100 doesn't really play for them if they add a full point on top of the 50 for the longer term risk

    BUT.............If you leave the rate unchanged and keep it the same as the 50, which is a full point over the 30, the payment drops a bunch to $1380. Noting also, that it is virtually all interest for 75 years, or basically a whole life span. Meaning, the collect interest cradle to grave and move on to the next dimwit.

    look at the pay off graph, and you will see what truly happens.



    1.jpg



    2.jpg
     
  8. Scorpio

    Scorpio Скорпион Founding Member Board Elder Site Mgr Site Supporter ++

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    we must also ask, if the retail product becomes avail in 50's or 100's, is .gov then going to also have a back stop of treasuries to shove the risk on????

    Meaning, a bank currently can buy the 30 yr treas and sell the 30 yr mort and lock in the spread.

    How does a bank 'hedge' and lock in the spread if no 50 or 100 exists from .fed?
     
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  9. Ensoniq

    Ensoniq Non-Black Member Midas Member Site Supporter ++

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    100year mortgage?

    Shoot me now
     

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